The seven tax changes of 2024 you need to know

Income tax cuts, super changes and even a question mark over Capital Gains Tax will combine next year.

There is a political risk surrounding the planned tax changes but it’s likely the most important ones will be introduced.

By mid-2024 Australian investors will wake up to a changed tax regime.

But for smart investors that should not be a surprise.

In fact the time to take advantage of those looming changes is now as we move towards July 1 next year.

There is an element of political risk around the planned changes, but it now seems very likely that the most important changes will all come to pass. The uncertainty lies only in details such as whether the new taxes on super are based on paper gains or real gains (that is, unrealised or realised profits).

The Stage 3 Tax Cuts

The final segment of personal tax cuts are due to kick in on July 1 next year. This is the final phase of the cuts which have ascended through income tiers since first introduced by the Coalition. Consequently this set of cuts go to higher income earners.

The cuts have been controversial and branded as a gift for the wealthy. However, a report by the independent Parliamentary Budget Office found that the average full-time worker will be $1500 worse off if the cuts don’t go ahead.

Juston Jirwander, director and chartered accountant at Bishop Collins, recently explained how the cuts will work. Someone earning $200,000 this financial year will pay $60,667 in tax but this will decrease by $9075 to $51,592 next financial year after both the 32.5 per cent and 37 per cent tax brackets are removed and replaced with a new flat 30 per cent tax bracket from $45,000 to $200,000.

Financial advisers suggest that if you move now you can optimise these future cuts by getting tax deductions which will be bigger pre-July 1 next year than they will be going forward. For example, prepay interest on investment loans or income protection policies before June 30, 2024.

In normal times, prepaying interest is purely a tax deferral strategy, but in this financial year it will have an extra benefit.

New super tax.

July 1, 2025. It sounds like it’s miles away – but investing is a long-term game and decisions made in the coming 18 months will directly affect how an investor may be exposed to the new super tax. As it stands the tax will kick in on super earnings above $3m and will be set at 15 per cent.

This will come on top of the existing 15 per cent tax which kicks in on earnings above $1.9m. Put together there will be a tax of 30 per cent on wealthy super investors. This new tax – the 15 per cent over $3m – has not yet passed in parliament and it is controversial because it breaks a core tax principle by taxing unrealised (or paper) gains.

(To be precise, the so-called Division 296 tax will be 15 per cent on earnings on superannuation balances above $3m).

A further screamer inside the planned legislation is that taxable gains will have to be paid, but taxable losses do not get refunded. Instead they will be carried forward in a manner similar to capital gain tax rules. Parliamentary crossbenchers are being lobbied in an effort to adjust the terms of this tax. Among the ideas are using a ‘‘deeming’’ rule. Either way, the tax is going to happen and for long-term investors – especially property investors – there are 18 months to review portfolios and to adjust allocations accordingly.

Mandatory super contribution

The Superannuation Guarantee Charge – where you must, by law, contribute a set amount of your annual salary to super – rises again on July 1, 2024 to 11.5 per cent. With the Labor government in power there is virtually no risk that this escalating charge will be ‘‘frozen’’ in the year ahead.

For investors the key effect of a higher SGC is that the ability to voluntarily contribute to super becomes ever less useful. If, as expected, the caps stay steady at the current levels of $27,500 for pre-tax (concessional) contributions but the SGC rises, then the amount you can voluntarily contribute to super inside the cap effectively gets reduced again.

Investment bonds and negative gearing

The investment bond sector has been enjoying a rebound thanks in part to the increasingly restrictive rules set for superannuation.

The bonds are heavily marketed to salary earners who pay more than 30 per cent tax – because the bonds are taxed at 30 per cent.

Investors can gain advantage from the gap between the bond rate and their marginal tax rate.

However, from July 1 next year the new flat 30 per cent tax bracket from $45,000 to $200,000 kicks in. This means that around 95 per cent of all Australians will pay a tax rate of no more than 30 per cent.

Similarly, for negative gearing, if you are investing in property for the tax deductions, the chances are that you will pay less tax from July 1 and if you do then negative gearing may not be as important as it has been.

Division 293

If it sounds like a block in an open air prison, but Division 293 – like its soon-to-be-born cousin Division 296 (see above) – is instead merely another pinch on building wealth through super.

It is the tax clawback which reduces the tax deductibility of superannuation contributions for those earning more than $250,000 a year.

The thing is, Division 293 – unlike other aspects of super such as the ‘‘caps’’ for contributions and total amounts that avoid tax – is not indexed. As a result each year the effective concession offered for high-income super earners reduces steadily. With our inflation rate still running between 5 and 6 per cent, the squeeze will continue next year.

The amount you can have tax free in super could rise again

In July 2023 many people were caught by surprise when the government lifted the amount you can have in super before paying tax on earnings from $1.7m to $1.9m. The change was due to indexation linked with our surging inflation rate earlier this calendar year.

Peter Burgess, the CEO of the Self Managed Super Funds Association, says it’s too early yet to make a final call on whether the ‘‘cap’’ will move again on July 1, 2024 but investors should keep an eye on the CPI readings in the coming months to see if the dial may shift again.

The CGT scare

The family home is free of capital gains tax and that rule is a sacred cow among policy makers. Anyone who even suggests it could change will pay a heavy price (just ask former ALP leader Bill ­Shorten.)

But in an unprecedented move, recently the Administrative Appeals Tribunal overruled the Australian Taxation Office and announced that change of value on a primary residence could be set against tax. Huh! Yes, believe it or not, as we reported recently, in the case of Bowerman v Commissioner of Taxation, 86-year-old Sydney retiree Jenifer Bowerman argued successfully that the capital loss on selling her principal place of residence in Sydney’s south should be claimable as a tax deduction in her personal tax ­return.

The ATO is very likely to appeal this decision and the issue of a CGT charge on the family home will be put back in its box – but it ain’t over till it’s over. Keep an eye on this saga; it just might give ammunition to tax reformers who want to scrap the CGT exemption on the family home.